Benchmarking the efficiency model for working capital management: data envelopment analysis approach

Abstract

PurposeThis paper evaluates the working capital management (WCM) efficiency of the Indian manufacturing industries through data envelopment analysis (DEA) and empirically investigates the influence of several exogenous variables on the WCM efficiency.Design/methodology/approachWCM efficiency was calculated using BCC input-oriented DEA model. Further, the panel data fixed effect model was used on a sample of 1391 Indian manufacturing firms spread across nine industries, covering the period from 2008 to 2019.FindingsFirstly, the WCM efficiency of Indian manufacturing industries has been stable over the analysis period. Secondly, the capacity to generate internal resources, size, age, productivity, gross domestic product and interest rate significantly influence WCM efficiency.Research limitations/implicationsFirst, the selected study period has observed various economic uncertainties including demonetization and recession, so the scenario might differ in normal conditions or country-wise. Second, the findings might not be generalizable to the developed economies, since the current study sample belongs to a developing economy, which further provides scope for comparative study.Practical implicationsAn efficient model for managing the working capital comprising most vital determinants could enhance the firms' valuation and goodwill. Also, this study would be helpful for financial executives, manufacturers, policymakers, investors, researchers and other stakeholders.Originality/valueThis study estimates the industry-wise WCM efficiency of the Indian manufacturing sector and suggests measures to the concerned parties on areas to focus on and provide evidence on the estimated relationships of firm-level and macroeconomic determinants with WCM efficiency.